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Raw Material Costs Likely To Dampen Earnings

Although corporate earnings for the June quarter will get a boost from a favourable base, more cash in the system and a weaker currency, higher raw material costs, bigger loan-loss provisions for banks and muted demand for materials in a dull economy could keep profit growth subdued. Expectations on the Street are tempered even though analysts have penciled in spends by the government on rural schemes and projects ahead of the general elections.Kotak Institutional Equities believes the net income in Q1FY19 for its coverage universe will be flat year-on-year while for the BSE 30 companies, the growth is pegged at just 6% y-o-y.

While software services companies and drug firms stand to gain from the depreciating currency, the elevated prices of metals will once again boost the bottom lines of producers. Moreover, rising levels of cash and the waning impact of demonetization and GST appear to have helped consumption going by the sharp jump in sales of cars and two-wheelers.

However, for those using costly inputs, margins could be under some pressure. Few companies have been able to pass on the higher cost of raw materials to consumers; some are apprehensive they might not achieve a meaningful increase in volumes if prices are raised. Telecom players have been hit badly by the entry of Reliance Jio and should continue to report modest profits as they grapple with continuously falling tariffs and pay for expensive spectrum.

Capex data for the June quarter, from CMIE, which reflects a sharp fall in new government projects suggesting the engineering sector may not have won as many orders as they expected. Moreover, while the number of stalled projects was lower, investments by the private sector were modest. Nonetheless, the government’s thrust on roads and affordable housing projects would have stimulated demand for construction materials.

However, the real estate sector is not expected to fare too well as volumes growth has been slow.

Post the March quarter results, earnings estimates for 2018-19 were trimmed by about 3-3.5%; despite a low base, the quarter saw earnings for the Nifty companies fall by 9% y-o-y. Corporate results for 2017-18 were extremely disappointing; despite elevated commodity prices, the top line for an aggregate of 2,281 companies grew at 8.6% in 2017-18, a shade slower than the 9.9% rise in 2016-17. While the operating profit margins were flat, thanks to expenditure being reined in, higher taxes, interest and depreciation resulted in net profits rising by less than 11% compared with a more robust 26% increase in the previous year. That was despite a big jump in other income.